Does Bankruptcy Clear All Debt?
Bankruptcy clears unsecured debt, and may clear all debt depending upon your circumstances, and which Chapter of bankruptcy you file. The goal in most bankruptcy filings is to receive a discharge of debt. This article addresses the primary categories of debt and how they are addressed in bankruptcy.
Secured Debt In Bankruptcy
Secured debt is debt secured by property. Vehicle loans and mortgages are the primary examples. The general rule is if you keep the property, you keep the debt. You can also surrender the property to the lender, in exchange for discharge of the debt.
As a result, secured debt can be cleared or discharged in bankruptcy, depending upon whether you choose to keep the property. Many clients with a vehicle worth $5,000.00 come to bankruptcy with a vehicle loan balance far exceeding the value of the vehicle. In that instance, the client may choose to surrender the property in exchange for discharge of the debt.
If you choose to keep the property, you may sign a reaffirmation agreement. The reason for this is the filing of the bankruptcy severs the contractual agreement between you and the lender. If you wish to keep the property, the lender may require a reaffirmation agreement. There are some instances in which we will recommend you not file a reaffirmation agreement—we can discuss those specific instances with you if you schedule a consultation.
Unsecured Debt In Bankruptcy
Unsecured debt comes in a few sizes. General unsecured debt includes credit card debt, medical bills, and other debt not secured by property. General unsecured debt is discharged in bankruptcy, and usually provides the greatest relief for debtors who choose to file.
Priority Unsecured Debt
Some debt is unsecured, but is classified as priority debt. Tax debt is an example. The rules regarding which tax debt is discharged in bankruptcy have a few twists and turns and you can reach more about those rules on our blog HERE.
Spousal and child support are also unsecured debt, but treated as priority debt. Spousal support and child support are not discharged in bankruptcy.
Criminal fines and balances on government over-payment of benefits are also priority unsecured debt, not discharged in bankruptcy.
Judgments
Whether a judgment will be discharged depends upon how much equity you may have in real estate. The filing of the bankruptcy discharges the debt as to you, the person. If you are a real property owner who falls within the rules regarding home equity, a motion can be filed by your bankruptcy attorney for Lien Avoidance. This will make the judgment a non-issue for you moving forward.
An exception to the treatment of a judgment described above would be a judgment obtained as a result of criminal activity such as driving under the influence of alcohol.
Sales and Use Tax
While most income taxes older than 3 years old are discharged in bankruptcy, Sales and Use tax is an exception.
Speak With A Lawyer Today
If you have questions about whether bankruptcy clears debt, we are here to help. Call us at 704.749.7747 or click HERE to request a free phone consultation. We know you have choices. We hope you choose Layton Law.